futurescurves

A futures curve is a graphical representation of the prices of futures contracts for a given underlying across different maturities at a single point in time. It summarizes market expectations, storage costs, financing costs, and the convenience yield associated with owning the underlying asset.

Futures curves can take different shapes. In contango, later-dated futures trade at higher prices than nearby contracts, producing an upward-sloping curve. In backwardation, nearby futures are more expensive than those farther out, yielding a downward slope. The shape is influenced by factors such as storage availability and costs, interest rates, supply and demand expectations, and the convenience yield of holding the physical commodity.

Construction and interpretation are straightforward: collect futures prices for multiple maturities, usually from exchange quotes, and plot price against time to maturity. The curve reflects current conditions more than a precise forecast, and it can change with new information, liquidity, and roll activities. Traders interpret shifts in the curve as signals about storage economics, contango or backwardation pressures, and the relative attractiveness of rolling positions versus holding inventory.

Applications include pricing and hedging, risk management, and the execution of curve trades such as calendar spreads. Limitations include roll costs, liquidity differences across maturities, and the fact that curves are snapshots that can be distorted by temporary market frictions. Common examples occur in energy, agricultural, and metals markets, with oil often showing contango in ample supply and backwardation during shortages.